3. Income taxes


millions of Canadian dollars	2017			2016			2015
Current income tax expense (a)		(58	)		200			451
Deferred income tax expense (a) (b)		150			79			350
Total income tax expense (a) (c)		92			279			801
Statutory corporate tax rate (percent)		26.9			26.8			27.2
Increase (decrease) resulting from:
Disposals (d)		(5.3	)		(11.6	)		(0.4	)
Enacted tax rate change (a)		0.9			-			16.1
Other		(6.6	)		(3.8	)		(1.2	)
Effective income tax rate		15.9			11.4			41.7

(a)	On November 2, 2017 the British Columbia government enacted a 1 percent increase in the provincial tax rate from 11 percent to 12 percent. On June 30, 2015 the Alberta government enacted a 2 percent increase in the provincial tax rate, from 10 percent to 12 percent.

(b)	There were no material net (charges) credits for the effect of changes in tax laws and rates included in the provisions for deferred income taxes in 2016.

(c)	Cash outflow from income taxes, plus investment credits earned, was $322 million (2016 - $172 million, 2015 - $202 million).

(d)	2017 disposals are primarily associated with the sale of surplus property in Ontario. 2016 disposals are primarily associated with the sales of company-owned Esso retail sites and the general aviation business. Capital gains tax treatment was applied on the majority of disposals.

In 2017 and 2016, the decrease in the statutory tax rate in the other category mainly represents prior year adjustments and re-assessments.

Deferred income taxes are based on differences between the accounting and tax values of assets and liabilities. These differences in value are re-measured at each year-end using the tax rates and tax laws expected to apply when those differences are realized or settled in the future. Components of deferred income tax liabilities and assets as at December 31 were:


millions of Canadian dollars	2017			2016			2015
Depreciation and amortization		5,564			5,361			4,677
Successful drilling and land acquisitions		762			891			922
Pension and benefits		(422	)		(457	)		(396	)
Asset retirement obligation		(376	)		(396	)		(406	)
Capitalized interest		118			114			104
LIFO inventory valuation (a)		(318	)		(240	)		-
Tax loss carryforwards		(936	)		(1,056	)		(610	)
Other (a)		(196	)		(212	)		(100	)
Net long-term deferred income tax liabilities		4,196			4,005			4,191

LIFO inventory valuation (a)		-			-			(112	)
Other (a)		-			-			(160	)
Net current deferred income tax assets		-			-			(272	)

Net current deferred income tax liabilities (a)		-			-			41

Net deferred income tax liabilities		4,196			4,005			3,960

(a)	Effective 2016, under ASU 2015-17, deferred tax assets and liabilities have been classified as non-current. 2015 was not restated.

Unrecognized tax benefits

Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts recognized in the financial statements.

The following table summarizes the movement in unrecognized tax benefits:


millions of Canadian dollars	2017			2016			2015
Balance as of January 1		106			132			151
Additions for prior years’ tax position		2			2			10
Reductions for prior years’ tax positions		-			(18	)		(4	)
Reductions due to lapse of the statute of limitations		-			(5	)		-
Settlements with tax authorities		(30	)		(5	)		(25	)
Balance as of December 31		78			106			132

The unrecognized tax benefit balances shown above are predominately related to tax positions that would reduce the company’s effective tax rate if the positions are favourably resolved. Unfavourable resolution of these tax positions generally would not increase the effective tax rate. The 2017, 2016 and 2015 changes in unrecognized tax benefits did not have a material effect on the company’s net income or cash flow. The company’s tax filings from 2010 to 2017 are subject to examination by the tax authorities. Tax filings from 1998, 2000 and 2003 to 2009 have open objections and therefore are also subject to examination by the tax authorities. The Canada Revenue Agency has proposed certain adjustments to the company’s filings. Management is currently evaluating those proposed adjustments and believes that a number of outstanding matters are expected to be resolved in 2018. The impact on unrecognized tax benefits and the company’s effective income tax rate from these matters is not expected to be material.

Resolution of the related tax positions could take many years to complete. It is difficult to predict the timing of resolution for tax positions since such timing is not entirely within the control of the company.

The company classifies interest on income tax related balances as interest expense or interest income and classifies tax related penalties as operating expense.